Self-exciting Corporate Defaults: Contagion vs. Frailty

Why do corporate defaults cluster? This paper explores the role of contagion,
by which the default of a firm has a direct impact on the conditional default
rates of the surviving firms, channeled through the complex web of contractual
relationships in the economy. We develop filtered maximum likelihood estimators
and goodness-of-fit tests for point processes to measure the additional impact
of contagion on default rates, over and beyond that due to firms' exposure
to observable or unobservable (frailty) risk factors. For U.S. firms during
1970--2006, we find strong evidence that contagion represents a significant
additional source of default clustering.